Breaking Down Auto Loan Add-Ons

Buying a car can be stressful for many reasons. You may have to haggle for a fair price, search many dealerships for the vehicle that best suits your needs or struggle to understand which loan add-ons you need.

In the most recent Headlines and Fine Print episode, PACU President & CEO Dion Williams dives into different add-ons to auto loans, which ones may be most beneficial for those seeking to purchase and finance a new vehicle.

 GAP

Guaranteed Asset Protection (GAP) may be the most common product offered with your car loan. To keep things simple, GAP protects your equity if your car is totaled and the money left owed on the vehicle is less than the car is worth.

While add-ons on your loan can increase your car payment, GAP makes sense for many people. New cars depreciate the moment you drive off the lot. If financing exceeds the vehicle’s value, you may drive off the lot with a negative equity situation.

Depending on the lender, GAP is priced differently, so it’s essential to be diligent about your interest rates. Generally, direct financing GAP insurance through your financial institution is less expensive than the price offered at the dealership.

Credit Life

Credit life is a life insurance policy specific to a loan. If you pass away during the loan term, the coverage pays off the loan.

“While this may benefit some, I find that a term life policy that is not loan-specific is more cost-effective,” Dion says. “Term life is generally the least expensive life insurance and can cover more than you owe on your current loan.”

Credit Disability

Similar to credit life, credit disability is specific to the current loan and expires when the loan is paid. Its purpose is to help you make loan payments if you cannot work due to disability. However, you should ensure this is not already covered in any short-term or long-term disability coverage with your employer.

“The fine print here is to ensure you understand the definition of disability per the contract terms, the duration of the coverage and the cost of coverage,” Dion explains.

Unemployment

As the name implies, unemployment insurance assists with your loan payment if you are laid off or terminated. This would be fitting for you if you are concerned about losing your job and do not have emergency savings set aside. Dion says that for most people, setting aside three to six months of funds to cover expenses if you are let go from your job is more cost-effective than paying for unemployment coverage.

Debt Protection

Debt protection is more of a bundling option than the previous three coverages, which are more a la carte options. Depending on the policy, debt protection may cover life, disability and unemployment.

Depreciation Protection

While GAP covers negative equity in your vehicle, depreciation protection covers positive equity. This coverage protects the equity you want to use on your next vehicle purchase if your previous car was totaled.

Many more add-ons are not mentioned above. Still, hopefully, this information provides food for thought on which coverages may be right for you when buying or financing a vehicle.

If you’d like to explore past episodes, they are all archived on our YouTube and Spotify. If you have any questions about add-ons for auto loans or would like to suggest a future topic, email Dion at [email protected].